Schizophrenia is a devastating and costly mental illness with direct and unemployment costs approaching $95 billion per year. Cognitive impairments affect the majority of patients with schizophrenia. These impairments are strongly associated with poor long-term psychosocial outcomes and reflect a large and significant unmet clinical need. FDA approval of new drugs for cognitive impairment in patients with schizophrenia requires pharmaceutical companies to demonstrate not only improvements on cognitive tests, but also clear evidence that these cognitive changes lead to clinically meaningful improvements in functional capacity. Measures of functional capacity, known as co-primary measures, indicate the degree to which individuals have changed their potential to alter real-world behavior. At present, there are no standard measures of functional capacity, and existing data do not support the recommendation of any single instrument. The Virtual Reality Functional Capacity Assessment Tool (VRFCAT Copyright (c) 2011) is a novel computer based virtual-reality measure of functional capacity that relies on a realistic simulated environment to recreate routine activities of daily living. We designed it initially for use in domestic schizophrenia drug trials and were successful at developing and pilot testing it in the NIMH SBIR Phase 1 project. Findings on VRFCAT's reliability were encouraging and indicated that it may be superior to the most commonly used measure of functional capacity, the UPSA-2. In this Phase 2 SBIR application, we propose to further evaluate and establish the VRFCAT's sensitivity, reliability, validity and practicality, and prepare to commercialize it through NeuroCog Trials' existing sales and operational infrastructure. This application has 5 specific aims: 1) Examine VRFCAT's ability to measure changes in functional capacity by comparing it to the UPSA-2 in patients with schizophrenia and healthy controls; 2) Examine and compare the test-retest reliabilities of the VRFCAT and UPSA-2; 3) Determine the association between performance on the VRFCAT and performance on the standard measure of cognition, the MATRICS Consensus Cognitive Battery (MCCB); 4) Examine the relative strength of the relationship of the VRFCAT and the UPSA-2 with a measure of real-world functioning outcomes, the Specific Levels of Functioning (SLOF); 5) Assess the usability and practicality of the VRFCAT for both patients and research staff in multiple clinical trial settings. In Phase 1 we showed the VRFCAT to be a reliable measure. Phase 2 will allow us to further develop and commercialize the VRFCAT. This new and superior measure of functional capacity could improve clinical trials and facilitate approval for drugs to treat cognitive impairment in patients suffering from schizophrenia. The VRFCAT has the potential to fulfill the FDA's requirement of a reliable co- primary measure, and will help determine which new drugs have a meaningful impact on cognition and on the lives of schizophrenia patients.